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Chapter 6 Making the Customers Whole
ON THE MORNING of Tuesday, November 19th, 1963, awell-dressed but haggard-looking man in his middle thirtiespresented himself at the executive offices of the New YorkStock Exchange, at 11 Wall Street, with the announcement thathe was Morton Kamerman, managing partner of the brokeragefirm of Ira Haupt & Co., a member of the Stock Exchange,and that he wanted to see Frank J. Coyle, head of theExchange’s member-firms department. After checking, areceptionist explained politely that Mr. Coyle was tied up in ameeting, whereupon the visitor said that his mission was anurgent one and asked to see Robert M. Bishop, thedepartment’s second-in-command. Bishop, the receptionist found,was unavailable, too; he was tied up with an important phonecall. At length, Kamerman, who seemed to be growing moreand more distracted, was ushered into the presence of a lessexalted Exchange official named George H. Newman. He thenduly delivered his message—that, to the best of his belief, thecapital reserve of the Haupt firm had fallen below theExchange’s requirements for member firms, and that he wasformally reporting the fact, in accordance with regulations. Whilethis startling announcement was being made, Bishop, in anearby office, was continuing his important telephoneconversation, the second party to which was a knowledgeableWall Streeter whom Bishop has since declined to identify. Thecaller was telling Bishop he had reason to believe that twoStock Exchange member firms—J. R. Williston & Beane, Inc.,and Ira Haupt & Co.—were in financial trouble serious enoughto warrant the Exchange’s attention. After hanging up, Bishopmade an interoffice call to Newman to tell him what he hadjust heard. To Bishop’s surprise, Newman already had thenews, or part of it. “As a matter of fact, Kamerman is righthere with me now,” he said.
In this humdrum setting of office confusion there began oneof the most trying—and in some ways one of the mostserious—crises in the Stock Exchange’s long history. Before itwas over, this crisis had been exacerbated by the greater crisisresulting from the assassination of President Kennedy, and outof it the Stock Exchange—which has not always been noted foracting in the public interest, and, indeed, had been accusedonly a few months before by the Securities and ExchangeCommission of an anti-social tendency to conduct itself like aprivate club—emerged temporarily poorer by almost ten milliondollars but incalculably richer in the esteem of at least some ofits countrymen. The event that had brought Haupt andWilliston & Beane into straitened circumstances is history—or,rather, future history. It was the sudden souring of a hugespeculation that these two firms (along with various brokers notmembers of the Stock Exchange) had become involved in onbehalf of a single customer—the Allied Crude Vegetable Oil &Refining Co., of Bayonne, New Jersey. The speculation was incontracts to buy vast quantities of cottonseed oil and soybeanoil for future delivery. Such contracts are known as commodityfutures, and the element of speculation in them lies in thepossibility that by delivery date the commodity will be worthmore (or less) than the contract price. Vegetable-oil futures aretraded daily at the New York Produce Exchange, at 2Broadway, and at the Board of Trade, in Chicago, and theyare bought and sold on behalf of customers by about eighty ofthe four hundred-odd firms that belong to the Stock Exchangeand conduct a public business. On the day that Kamermancame to the Exchange, the Haupt firm was holding forAllied—on credit—so many cottonseed-oil and soybean-oilcontracts that the change of a single penny per pound in theprices of the commodities meant a twelve-million-dollar changein the value of the Allied account with Haupt. On the twoprevious business days—Friday the fifteenth and Monday theeighteenth—the prices had dropped an average of a little lessthan a cent and a half per pound, and as a result Haupt haddemanded that Allied put up about fifteen million dollars incash to keep the account seaworthy. Allied had declined to dothis, so Haupt—like any broker when a customer operating oncredit has defaulted—was faced with the necessity of selling outthe Allied contracts to get back what it could of its advances.
The suicidal extent of the risk that Haupt had undertaken isfurther indicated by the fact that while the firm’s capital in earlyNovember had amounted to only about eight million dollars, ithad borrowed enough money to supply a singlecustomer—Allied—with some thirty-seven million dollars tofinance the oil speculations. Worse still, as things turned out ithad accepted as collateral for some of these advancesenormous amounts of actual cottonseed oil and soybean oilfrom Allied’s inventory, the presence of which in tanks atBayonne was attested to by warehouse receipts stating theprecise amount and kind of oil on hand. Haupt had borrowedthe money it supplied Allied with from various banks, passingalong most of the warehouse receipts to the banks as collateral.
All this would have been well and good if it had not developedlater that many of the warehouse receipts were forged, thatmuch of the oil they attested to was not, and probably neverhad been, in Bayonne, and that Allied’s president, Anthony DeAngelis (who was later sent to jail on a whole parcel ofcharges), had apparently pulled off the biggest commercial fraudsince that of Ivar Kreuger, the match king.
Where was the missing oil? How could Allied’s direct andindirect creditors, including some of the most powerful andworldly-wise banks of the United States and Great Britain, havebeen so thoroughly gulled? Would aggregate losses on thewhole debacle finally total a hundred and fifty million dollars, assome authorities had estimated, or would the bill be evenbigger? How could a leading Stock Exchange firm like Haupthave been so foolish as to take on such an inconceivably riskycommitment for a single customer? These questions had noteven been raised, let alone answered, on November 19th; someof them have not been answered yet, and some of them maynot be answered for years. What began to emerge onNovember 19th, and what became clear in the harrowing daysthat followed, was that in the case of Haupt, which had abouttwenty thousand individual stock-market customers on its books,and in the case of Williston & Beane, which had about ninethousand, the impending disaster directly involved the personalsavings of many totally innocent persons who had never heardof Allied and had only the vaguest notion of what commoditytrading is.
KAMERMAN’S report to the Stock Exchange did not mean thatHaupt had gone broke, and at the time he made it Kamermanhimself surely did not think that his firm had gone broke;there is a great difference between insolvency and a merefailure to meet the Exchange’s rather stringent capitalrequirements, which are intended to provide a margin of safety.
Indeed, various Stock Exchange officials have said that on thatTuesday morning they did not consider the Haupt situation tobe especially serious, while the Williston & Beane situation, itwas clear from the first, was even less so. One of the firstreactions in the member-firms department was chagrin thatKamerman had come to the Exchange with his problem beforethe Exchange, through its elaborate system of audits andexaminations, had discovered the problem for itself. This, theExchange insists stubbornly, if a bit lamely, was a matter ofbad luck rather than bad management. As a matter of routine,the Exchange required each of its member firms to fill outdetailed questionnaires on its financial condition several times ayear, and as an additional check an expert accountant from theExchange staff descended unexpectedly on each member firmat least once a year to subject its books to a surpriseinspection. Ira Haupt & Co. had filled out its most recentquestionnaire early in October, and since the huge buildup inAllied’s commodities position with Haupt took place after that,the questionnaire showed nothing amiss. As for the surpriseinspection, the Exchange’s man was in the Haupt officesconducting it at the very time the trouble broke. The auditorhad been there for a week, his nose buried in Haupt’s accountbooks, but the task of conducting such an inspection is atedious one, and by November 19th the auditor hadn’t gotaround to examining the Haupt commodities department. “Theyhad set our man up with a desk in a department wherenothing unusual was going on,” an Exchange official has sincesaid. “It’s easy to say now that he should have smelledtrouble, but he didn’t.”
At midmorning on Tuesday the nineteenth, Coyle and Bishopsat down with Kamerman to see what needed to be doneabout Haupt’s problem, and what could be done. Bishopremembers that the atmosphere of the meeting was by nomeans grim; according to Kamerman’s figures, the amount ofcapital that Haupt needed to bring it up to snuff was about ahundred and eighty thousand dollars—an almost paltry sum fora firm of Haupt’s size. Haupt could make up the deficiencyeither by obtaining new money from outside or by convertingsecurities it owned into cash. Bishop urged the latter course asthe quicker and surer, whereupon Kamerman telephoned hisfirm and instructed his partners to begin selling some of theirsecurities at once. The difficulty apparently was going to besolved as simply as that.
But during the rest of the day, after Kamerman had left 11Wall, the crisis showed a tendency to go through the processthat in political circles had come to be called escalation. In thelate afternoon, an ominous piece of news arrived. Allied hadjust filed a voluntary-bankruptcy petition in Newark.
Theoretically, the bankruptcy did not affect the financial positionof its former brokers, since they held security for the moneythey had supplied Allied with; nevertheless, the news wasalarming in that it provided a hint of worse news to follow.
Such news, indeed, was not long in coming; the same evening,word reached the Stock Exchange that the managers of theNew York Produce Exchange, in an effort to forestall chaos intheir market, had voted to suspend all trading in cottonseed-oilfutures until further notice, and to require immediate settlementof all outstanding contracts at a price dictated by them. Sincethe dictated price would have to be a low one, this meant thatany remaining chance that Haupt or Williston & Beane had ofgetting out from under the Allied speculations on favorableterms was gone.
In the member-firms department that evening, Bishop wasfrantically trying to get in touch with G. Keith Funston, thepresident of the Stock Exchange, who was first at a midtowndinner and then on a train bound for Washington, where hewas scheduled to testify the next day before a congressionalcommittee. What with one thing and another, Bishop was busyin his office all evening; toward midnight, he found himself thelast man in the member-firms department, and, having decidedit was too late to go home to Fanwood, New Jersey, for thenight, he collapsed on a leather couch in Coyle’s office. He hada restless night there; the cleaning women were consideratelyquiet, he said afterward, but the phones kept ringing all nightlong.
Promptly at nine-thirty on Wednesday morning, the StockExchange’s board of governors met in the sixth-floorGovernors’ Room—which, with its regal red carpet, fierce oldportraits, and fluted gilt columns, carries rather uncomfortableconnotations of Wall Street’s checkered past—and, in accordancewith Exchange regulations, voted to suspend Haupt andWilliston & Beane because of their capital difficulties. Thesuspension was made public a few minutes after tradingopened, at ten o’clock, by Henry M. Watts, Jr., chairman ofthe board of governors, who ascended a rostrum thatoverlooks the trading floor, rang the bell that normally signalsthe beginning or ending of a day’s trading, and read anannouncement of it. From the point of view of the public, theimmediate effect of the action was that the accounts of thealmost thirty thousand customers of the two suspended firmswere now frozen—that is, the owners of the accounts couldneither sell their stocks nor get their money out. Touched bythe plight of these unfortunates, the Stock Exchange brass nowset about trying to help the beleaguered firms raise enoughcapital to lift the suspensions and free the accounts. In thecase of Williston & Beane, its efforts were triumphantlysuccessful. It developed that this firm needed about half amillion dollars to get back into business, and so manyfellow-brokers came forward to help out with loans that thefirm actually had to fight off unwanted offers. The half millionwas finally accepted partly from Walston & Co. and partly fromMerrill Lynch, Pierce, Fenner & Smith. (Cozily, the Beane ofWilliston & Beane was the very man who had been thecaboose when the firm’s name was Merrill Lynch, Pierce,Fenner & Beane.) Restored to financial health by this timelyinjection of capital, Williston & Beane was relieved of itssuspension—and its nine thousand customers were relieved oftheir anxiety—just after noon on Friday, or slightly more thantwo days after the suspension had been imposed.
But in the case of Haupt things went differently. It was clearby Wednesday that the capital-shortage figure of a hundredand eighty thousand dollars had been the rosiest of dreams.
Even so, it appeared that the firm might still be solvent despiteits losses on the forced sale of the oil contracts—on onecondition. The condition was that the oil in Bayonne tanks thatAllied had pledged to Haupt as collateral—and that now,through Allied’s default, belonged to Haupt—could be sold toother oil processors at a fair price. Richard M. Crooks, anExchange governor who, unlike nearly all his colleagues, was anexpert on commodities trading, figured that if the Bayonne oilwere thus unloaded, Haupt might still end up slightly in theblack. He therefore telephoned a couple of the country’s leadingvegetable-oil processors and urged them to bid on the oil. Thereplies he received were unanimous and startling. The leadingprocessors declined to make any bid at all, and they leftCrooks with the feeling that they were suspicious of theBayonne warehouse receipts held by Haupt—that they suspectedsome or all of them to be forgeries. If these suspicions werewell founded, it would follow that some or all of the oil attestedto by the receipts was not in Bayonne. “The situation was verysimple,” Crooks has said. “Warehouse receipts are accepted inthe commodities business as practically as good as currency,and now the possibility had been raised that millions of dollarsof Haupt’s assets consisted of counterfeit money.”
Still, all that Crooks knew definitely on Wednesday morningwas that the processors would not bid on Allied oil, andthroughout the rest of Wednesday and all day Thursday theExchange furiously went on trying to help Haupt get back onits feet along with Williston & Beane. Needless to say, thefifteen partners of Haupt were busy at the same endeavor, andin aid of it Kamerman told the Times buoyantly on Wednesdayevening, “Ira Haupt & Co. is solvent and is in an excellentfinancial position.” Also on Wednesday evening, Crooks haddinner in New York with a veteran commodities broker fromChicago. “Although I’m an optimist by temperament, myexperience tells me that these things always turn out to bemuch worse than they look at first,” Crooks said recently. “Imentioned this to my broker friend, and he agreed. The nextmorning at about eleven-thirty, he called me and said, ‘Dick,this thing is a hundred per cent worse than even you think.’”
A bit later, at midday on Thursday, the Exchange’smember-firms department learned that many of Allied’swarehouse receipts were indeed fake.
As nearly as can be determined, the Haupt partners weremaking the same unhappy discovery at about the same time.
At any rate, a number of them did not go home Thursdayevening but spent the night at their offices at 111 Broadway,trying to figure out what their position was. Bishop got hometo Fanwood that night, but he found that he could sleep hardlyany better there than on Coyle’s couch. Accordingly, he rosebefore dawn, took the Jersey Central’s five-eight to the city,and on a hunch went to the Haupt offices. There, in thepartners’ area—recently redecorated with modern contour chairs,marble-topped filing cabinets, and refrigerators disguised asdesks—he found several of the partners, unshaven andunkempt, drowsing in their chairs. “They were pretty shot bythen,” Bishop said later. And no wonder. After being awakened,they told him that they had been up all night calculating, andthat at about three o’clock they had come to the conclusionthat their position was hopeless; in view of the worthlessness ofthe warehouse receipts, the Haupt firm was insolvent. Bishoptook this disastrous intelligence with him to the Stock Exchange,where he waited for the sun to come up and for everyoneelse to come to work.
AT one-forty on Friday afternoon, when the stock market wasalready badly rattled by the rumors of Haupt’s impendingfailure, the first reports of the President’s assassination reachedthe Exchange floor, in garbled form. Crooks, who was there,says that the first thing he heard was that the President hadbeen shot, the second was that the President’s brother, theAttorney General, had also been shot, and the third was thatthe Vice-President had had a heart attack. “The rumors camelike machine-gun bullets,” Crooks says. And they struck withcomparable impact. In the next twenty-seven minutes, duringwhich no hard news arrived to relieve the atmosphere ofapocalypse, the prices of stocks declined at a rate unparalleledin the Exchange’s history. In less than half an hour, the valuesof listed stocks decreased by thirteen billion dollars, and theywould no doubt have dropped further if the board ofgovernors had not closed the market for the day at sevenminutes past two. The panic’s immediate effect on the Hauptsituation was to make the status of the twenty thousand frozenaccounts far worse, because now, in the event of Haupt’sbankruptcy and the consequent liquidation of many of theaccounts, the cashing in would have to be done at panic prices,with heavy losses to the accounts’ owners. A larger and lesscalculable effect of the events in Dallas was paralyzing despair.
However, Wall Street—or, rather, some Wall Streeters—had apsychological advantage over the rest of the country in thatthere was work at hand to be done. This convergence ofdisasters confronted them with a definable task.
Having testified in Washington on Wednesday afternoon,Funston had returned to New York that evening and hadspent most of Thursday as well as Friday morning working ongetting Williston & Beane back in business. Sometime duringthat period, as it was gradually made clear that Haupt was notmerely short of capital but actually insolvent, Funston becameconvinced the Exchange and its member firms must considerdoing something virtually unprecedented—that is, reimburse theinnocent victims of Haupt’s imprudence with their own money.
(The nearest thing to a precedent for such action was the caseof DuPont, Homsey & Co., a small Stock Exchange firm thatwent bankrupt in 1960 as a result of fraud by one of itspartners; the Exchange then repaid the firm’s customers themoney they had been divested of—about eight hundredthousand dollars.) Now, having hurried back to his office froma lunch date shortly before the emergency closing of themarket, Funston set about putting his plan into action, callingabout thirty leading brokers whose offices happened to benearby and asking them to trot over to the Exchangeimmediately as an unofficial delegation representing itsmembership. Shortly after three o’clock, the brokers wereassembled in the South Committee Room—a somewhat smallerversion of the Governors’ Room—and Funston set before themthe facts of the Haupt case as he then knew them, along withan outline of his plan for a solution. The facts were these:
Haupt owed about thirty-six million dollars to a group of UnitedStates and British banks; since over twenty million of its assetswere represented by warehouse receipts that now appeared tobe worthless, there was no hope that Haupt could pay itsdebts. In the normal course of events, therefore, Haupt wouldbe sued by the creditor banks when the courts reopened nextweek, the cash and many of the securities held by Haupt forits customers would be tied up by the creditors, and, accordingto Funston’s liberal estimate, some of the customers might endup getting back—after an extended period caused by legaldelays—no more than sixty-five cents on the dollar. And therewas another side to the case. If Haupt were to go intobankruptcy, the psychological effect of this, combined with thepalpable effect of Haupt’s considerable assets’ being thrown onthe market, might well lead to further depression of a stockmarket already in wild retreat at a time of grave national crisis.
Not only the welfare of the Haupt customers was at stake,then, but perhaps the national welfare, too. Funston’s plan,simple enough in outline, was that the Stock Exchange or itsmembers put up enough money to enable all the Hauptcustomers to get back their cash and securities—to be onceagain “whole,” in the banking expression. (The bankingexpression is etymologically sound; “whole” derives from theAnglo-Saxon “hal,” which meant uninjured or recovered frominjury, and from which “hale” is also derived.) Funston furtherproposed that Haupt’s creditors, the banks, be persuaded todefer any efforts to collect their money until the customers hadbeen taken care of. Funston estimated that the amount neededto do the job might run to seven million dollars, or even more.
Almost to a man, the assembled brokers agreed to supportthis public-spirited, if not downright eleemosynary, plan. Butbefore the meeting was over a difficulty arose. Now that theStock Exchange and the member firms had decided on a deedof self-sacrifice, the problem confronting each side—to a certainextent, anyway—was how to arrange to have the other side dothe sacrificing. Funston urged the member firms to take overthe entire matter. The firms declined this suggestion with thanksand countered by urging the Stock Exchange to handle it. “Ifwe do,” Funston said, “you’ll have to repay us the amount wepay out.” Out of this not very dignified dialogue emerged anagreement that initially the funds would come out of theExchange’s treasury, with repayment to be apportioned amongthe member firms later. A three-man committee, headed byFunston, was empowered to conduct negotiations to bring thedeal off.
The chief parties that needed negotiating with were Haupt’screditor banks. Their unanimous consent to the plan wasessential, because if even one of them insisted on immediateliquidation of its loans “the pot would fall in,” as the Exchange’schairman, Henry Watts—a fatherly-looking graduate of Harvardand of Omaha Beach, 1944—pungently put it. Prominent amongthe creditors were four local banks of towering prestige—ChaseManhattan, Morgan Guaranty Trust, First National City, andManufacturers Hanover Trust—which among them had lentHaupt about eighteen and a half million dollars. (Three of thebanks have remained notably reticent about the exact amountof their ill-fated loans to Haupt, but blaming them for theirsilence would be like blaming a poker player who is less thangarrulous about a losing night. The Chase, however, has saidthat Haupt owed it $5,700,000.) Earlier in the week, GeorgeChampion, chairman of the Chase, had telephoned Funston; notonly did the Stock Exchange have a friend at Chase, Championassured him, but the bank stood ready to give any help itcould in the Haupt matter. Funston now called Champion andsaid he was ready to take him up on his offer. He and Bishopthen began to try to assemble representatives of the Chase andthe three other banks for an immediate conference. Bishopremembers that he felt highly bearish about the chances ofrounding up a group of bankers at five o’clock on aFriday—even such an exceptional Friday as this one—but to hissurprise he found practically all of them at their battle stationsand willing to come straight to the Exchange.
Funston and his fellow-negotiators for the Exchange—ChairmanWatts and Vice-Chairman Walter N. Frank—conferred with thebankers from shortly after five until well into the dinner hour.
The meeting was constructive, if tense. “First, we all agreed thatit was a devil of a situation all around,” Funston subsequentlyrecalled. “Then we got down to business. The bankers, ofcourse, were hoping that the Exchange would pick up thewhole thing, but we quickly disabused them of that notion.
Instead, I made them an offer. We would put up a certainsum in cash solely for the benefit of the Haupt customers; inexchange for every dollar that we put up, the banks woulddefer collection—that is, would temporarily refrain fromforeclosing—on two dollars. If, as we then estimated, twenty-twoand a half million was needed to make Haupt solvent, wewould put up seven and a half, and the banks would defercollection of fifteen. They weren’t so sure about ourfigures—they thought we were too low—and they insisted thatthe Exchange’s claim to get back any of its contribution out ofHaupt assets would have to come after the banks’ claims fortheir loans. We agreed to that. We all fought and negotiated,and when we finally went home there was general agreementon the broad outline of the thing. Of course, everyonerecognized that this meeting was only preliminary—to begin with,by no means all the creditor banks were represented at it—andthat both the detail work and much of the hard bargainingwould have to be done over the weekend.”
Just how much detail work and hard bargaining lay aheadbecame manifest on Saturday. The Exchange’s board met ateleven, and more than two-thirds of its thirty-three memberswere present; because of the Haupt crisis, some governors hadcancelled weekend plans, and others had flown in from theirregular stands in such outposts as Georgia and Florida. Theboard’s first action—a decision to keep the Exchange closed onMonday, the day of the President’s funeral—was accomplishedwith deep relief, because the holiday would give the negotiatorsan additional twenty-four hours in which to hammer out a dealbefore the deadline represented by the reopening of the courtsand the markets. Funston brought the governors up to date onwhat was known about Haupt’s financial position and on thestatus of the negotiations that had been begun with the banks;he also gave them a new estimate of the sum that might berequired to make the Haupt customers whole—nine milliondollars. After a fractional moment of silence, several governorsrose to say, in essence, that they felt that more than moneywas at stake; it was a question of the relation of the StockExchange to the country’s many million investors. The meetingwas then temporarily adjourned, and, with the authority of thegovernors’ lofty sentiments to back it up, the Exchange’sthree-man committee got down to negotiations with thebankers.
Thus, the pattern for Saturday and Sunday was set. While therest of the nation sat stupefied in front of its television sets,and while the downtown Manhattan streets were as deserted asthey must have been during the yellow-fever epidemics of theearly nineteenth century, the sixth floor of 11 Wall Street was anexus of utterly absorbed activity. The Exchange’s committeewould remain closeted with the bankers until a point wasreached at which Funston and his colleagues needed furtherauthorization; then the board of governors would go intosession again and either grant the new authority or decline todo so. Between sessions, the governors congregated in thehallways or smoked and brooded in empty offices. An ordinarilyobscure corner of the Exchange bureaucracy called the Conductand Complaints Department was having a busy weekend, too; astaff of half a dozen there was continuously on the phonedealing with anxious inquiries from Haupt customers, who werefeeling anything but hale. And, of course, there were lawyerseverywhere—“I never saw so many lawyers in my life,” oneveteran Stock Exchange man has said. Coyle estimates thatthere were more than a hundred people at 11 Wall Streetduring most of the weekend, and since practically all localrestaurants as well as the Exchange’s own eating facilities wereclosed, the food problem was acute. On Saturday, the entireoutput of a downtown lunch counter that had shrewdly stayedopen was bought up and consumed, after which a taxi wasdispatched to Greenwich Village for more supplies; on Sunday,one of the Exchange secretaries thoughtfully brought in anelectric coffee-maker and a huge bag of groceries and set upshop in the Chairman’s Dining Room.
The bankers’ negotiating committee now included men fromtwo Haupt creditors that had not been represented onFriday—the National State Bank of Newark and the ContinentalIllinois National Bank & Trust Co., of Chicago. (Stillunrepresented were the four British creditors—Henry Ansbacher& Co.; William Brandt’s Sons & Co., Ltd.; S. Japhet & Co.,Ltd.; and Kleinwort, Benson, Ltd. Moreover, with the weekendhalf gone, they seemed to be temporarily unrepresentable. Itwas decided to continue negotiating without the British banksand then, on Monday morning, present any agreement to themfor approval.) A crucial point at issue, it now developed, wasthe amount of cash that would be needed from the StockExchange to fulfill its part of the bargain. The bankers acceptedFunston’s formula under which they would defer collection oftwo dollars for every dollar that the Exchange contributed tothe cause, and they did not doubt that Haupt was stuck withabout twenty-two and a half million dollars’ worth of uselesswarehouse receipts; however, they were unwilling to take thatfigure as the maximum amount that might be necessary toliquidate Haupt. To be on the safe side, they argued, theamount ought to be based on Haupt’s over-all indebtedness tothem—thirty-six million—and this meant that the Exchange’scash contribution would have to be not seven and a halfmillion but twelve. Another point at issue was the question ofto whom the Exchange would pay whatever sum was agreedupon. Some of the bankers thought the money ought to gostraight into the coffers of Ira Haupt & Co., to be dispensed bythe firm itself to its customers; the trouble with this suggestion,as the Exchange’s representatives were not slow to point out,was that it would put the Exchange’s contribution entirelybeyond its control. As a final complication, one bank—theContinental Illinois—was distinctly reluctant to enter into the dealat all. “The Continental’s people were thinking in terms of theirbank’s exposure,” an Exchange man has explainedsympathetically. “They thought our arrangement might ultimatelybe more damaging to them than a formal Haupt bankruptcyand receivership. They needed time to consider, to make surethey were taking the proper action, but I must say they wereco?perative.” Indeed, since it was primarily the Stock Exchange’sgood name that was at the center of the planned deal, itwould appear that all the banks were marvels of co?peration.
After all, a banker is legally and morally charged with doing thebest he can for his depositors and stockholders, and istherefore hardly in a position to indulge in grand gestures forthe public good; if his eyes are flinty, they may mask a kind,but stifled, heart. As for the Continental, it had reason to beparticularly slow to act, because its “exposure” amounted to wellover ten million dollars, or much more than that of any otherbank. No one concerned has been willing to say exactly whatthe points were on which the Continental held out, but itseems safe to assume that no bank or person who had lentHaupt less than ten million dollars can know exactly how theContinental felt.
By the time the negotiations were recessed, at about sixo’clock Saturday evening, a compromise had been reached onthe main issues—on the amount-of-cash controversy by anagreement that the Exchange would put up an initial seven anda half million with a pledge to go up to twelve million if itbecame necessary, and on the controversy about how themoney would be paid to the Haupt customers by agreementthat the Exchange’s chief examiner would be appointedliquidator of Haupt. But the Continental was still recalcitrant,and, of course, the British banks had not yet even beenapproached. In any event, everybody shut up shop for thenight, with pledges to return early the next afternoon, eventhough it was Sunday. Funston, who was coming down with abad cold, went home to Greenwich. The bankers went home toplaces like Glen Cove and Basking Ridge. Watts, a diehardcommuter from Philadelphia, went home to that tranquil city.
Even Bishop went home to Fanwood.
At two o’clock Sunday afternoon, the Exchange governors,their ranks now augmented by arrivals from Los Angeles,Minneapolis, Pittsburgh, and Richmond, met in joint session withthe thirty representatives of member firms, who were anxiousto learn what they were being committed to. After the currentstatus of the emerging agreement had been explained to them,they voted unanimously in favor of going ahead with it. As theafternoon progressed, even Continental Illinois softened itsopposition, and at about six o’clock, after a series of franticlong-distance telephone calls and attempts to track downContinental officers on trains and in airports, the Chicago bankagreed to go along, explaining that it was doing so in thepublic interest rather than in pursuance of its officers’ bestbusiness judgment. At about the same time, the Times’ financialeditor, Thomas E. Mullaney—who, like the rest of the press,had been rigidly excluded from the sixth floor throughout thenegotiations—called Funston to say he had heard rumors of aplan on Haupt in the offing. Because the British banks wouldhave reason to be miffed, at the very least, if they should readin the next morning’s air editions of a scheme to dispose oftheir credits without their agreement, or even their knowledge,Funston had to give a reply that could only depress still furtherthe spirits of the waiting twenty thousand customers. “There isno plan,” he said.
THE question of who would undertake the delicate task ofcajoling the British banks had come up early Sunday afternoon.
Funston, despite his cold, was anxious to make the trip (forone thing, he has since admitted, the drama of it appealed tohim), and had gone as far as getting his secretary to reservespace on a plane, but as the afternoon progressed and thelocal problems continued to appear intractable, it was decidedthat he couldn’t be spared. Several other governors quicklyvolunteered to go, and one of them, Gustave L. Levy, waseventually selected, on the ground that his firm, Goldman,Sachs & Co., had had a long and close association withKleinwort, Benson, one of the British banks, and that Levyhimself was on excellent terms with some of the Kleinwort,Benson partners. (Levy would later succeed Watts aschairman.) Accordingly, Levy, accompanied by an executive anda lawyer of the Chase—who were presumably included in thehope that they would set the British banks an inspiringexample of co?peration—left 11 Wall Street shortly after fiveo’clock and caught a London-bound jet at seven. The trio satup on the plane most of the night, carefully planning theapproach they would make to the bankers in the morning.
They were well advised to do so, because the British bankscertainly had no cause to feel co?perative; their StockExchange wasn’t in trouble. And there was more to it thanthat. According to unimpeachable sources, the four Britishbanks had lent Haupt a total of five and a half million dollars,and these loans, like many short-term loans made by foreignbanks to American brokers, had not been secured by anycollateral. Sources only fractionally more impeachable maintainthat some of the loans had been extended very recently—thatis, a week or less before the debacle. The money lent isknown to have consisted of Eurodollars, a phantom butnonetheless serviceable currency consisting of dollar deposits inEuropean banks; some four billion Eurodollars were activelytraded among European financial institutions at that time, andthe banks that lent the five and a half million to Haupt hadfirst borrowed them from somebody else. According to a localexpert in international banking, Eurodollars are customarilytraded in huge blocks at a relatively tiny profit; for instance, abank might borrow a block at four and a quarter per centand lend it at four and a half per cent, at a net advantage ofone fourth of one per cent per annum. Obviously, suchtransactions are looked upon as practically without risk.
One-fourth of one per cent of five and a half million dollarsover a period of one week amounts to $264.42, which givessome indication of the size of the profit on the Haupt deal thatthe four British banks would have been able to divide amongthemselves, less expenses, if everything had gone as planned.
Instead, they now stood to lose the whole bundle.
Levy and the Chase men arrived red-eyed in London shortlyafter daybreak on a depressingly drizzly morning. They went tothe Savoy to change their clothes and have breakfast and thenheaded straight for the City, London’s financial district. Theirfirst meeting was at the Fenchurch Street establishment ofWilliam Brandt’s Sons, which had put up over half of the fiveand a half million. The Brandt partners courteously offeredcondolences on the death of the President, and the Americansagreed that it was a terrible thing, whereupon both sides cameto the point. The Brandt men knew of Haupt’s impendingfailure but not of the plan now afoot to rescue the Hauptcustomers by avoiding a formal bankruptcy; Levy explained this,and an hour’s discussion followed, in the course of which theBritons showed a certain reluctance to go along—as well theymight. Having just been taken in by one group of Yankees,they were not anxious to be immediately taken in by another.
“They were very unhappy,” Levy says. “They raised hell withme as a representative of the New York Stock Exchange, oneof whose members had got them into this jam. They wantedto make a trade with us—to get a priority in the collection oftheir claims in exchange for coming along with us and agreeingto defer collection. But their trading position wasn’t really good;in a bankruptcy proceeding, their claims, based on unsecuredloans, would have been considered after the claims of creditorswho held collateral, and in my opinion they would have nevercollected a nickel. On the other hand, under the terms of ouroffer they would be treated equally with all the other Hauptcreditors except the customers. We had to explain to them thatwe weren’t trading.”
The Brandt men replied that before deciding they wanted tothink the matter over, and also to hear what the other Britishbanks said. The American delegates then repaired to theLondon office of the Chase, on Lombard Street, where, byprearrangement, they met with representatives of the threeother British banks and Levy had a chance for a reunion withhis Kleinwort, Benson friends. The circumstances of the reunionwere obviously less than happy, but Levy says that his friendstook a realistic view of their situation and, with heroicobjectivity, actually helped their fellow-Britons to see theAmerican side of the question. Nevertheless, this meeting, likethe earlier one, broke up without commitment by anyone. Levyand his colleagues stayed at the Chase for lunch and thenwalked over to the Bank of England, which was interested inthe Haupt loans to the extent that their default would affectBritain’s balance of payments. The Bank of England, throughone of its deputies, assured the visitors of its distress over bothAmerica’s national tragedy and Wall Street’s parochial one, andadvised them that while it lacked the power to tell the Londonbanks what to do, in its judgment they would be wise to goalong with the American scheme. Then, at about two o’clock,the trio returned to Lombard Street to wait nervously for wordfrom the banks. As it happened, a parallel vigil was thenbeginning on Wall Street, where it was nine o’clock on Mondaymorning, and where Funston, just arrived in his office and verymuch aware that only one day remained in which to get thedeal wrapped up, was pacing his rug as he waited for a callthat would tell him whether London was going to cause thepot to fall in.
Kleinwort, Benson and S. Japhet & Co. were the first toagree to go along, Levy recalls. Then—after a silence of perhapshalf an hour, during which Levy and his colleagues began tohave an agonizing sense of the minutes ticking away in NewYork—an affirmative answer came from Brandt. That was thebig one; with the chief creditor and two of the three others inline, it was all but certain that Ansbacher would join up. Ataround 4 P.M. London time, Ansbacher did, and Levy wasfinally able to place the call that Funston had been waiting for.
Their mission accomplished, the Americans went straight to theLondon airport, and within three hours were on a planeheaded home.
On getting the good news, Funston felt that the wholeagreement was pretty well in the bag at last, since all that wasneeded to seal the bag was the signatures of the fifteen Hauptgeneral partners, who seemed to have nothing to lose andeverything to gain from the plan. Still, the task of getting thosesignatures was a vital one. Short of a bankruptcy suit, whicheveryone was trying to avoid, no liquidator could distribute theHaupt assets—not even the marble-topped cabinets and therefrigerators—without the partners’ permission. Accordingly, lateon Monday afternoon the Haupt partners, each accompaniedby his lawyer, trooped into Chairman Watts’s office at the StockExchange to learn exactly what fate the Wall Street powers hadbeen arranging for them.
The Haupt partners could hardly have found the projectedagreement pleasant reading, inasmuch as it prescribed, amongother things, that they were to execute powers of attorneygiving a liquidator full control over Haupt’s affairs. However,one of their own lawyers gave them a short, pungent talkpointing out that they were personally liable for the firm’s debtswhether or not they signed the agreement, so they might aswell be public-spirited and sign it. More briefly, they were overa barrel. (Many of them later filed personal bankruptcy papers.)One startling event broke the even tenor of this gloomymeeting. Shortly after the Haupt lawyer had wound up hisdisquisition on the facts of life, someone noticed an unfamiliarand strikingly youthful face in the crowd and asked its ownerto identify himself. The unhesitating reply was “I’m RussellWatson, a reporter for the Wall Street Journal.” There was ashort, stunned silence, in recognition of the fact that anuntimely leak might still disturb the delicate balance of moneyand emotion that made up the agreement. Watson himself, whowas twenty-four and had been on the Journal for a year, hassince explained how he got into the meeting, and under whatcircumstances he left it. “I was new on the Stock Exchangebeat then,” he said afterward. “Earlier in the day, there hadbeen word that Funston would probably hold a pressconference sometime that evening, so I went over to theExchange. At the main entrance, I asked a guard where Mr.
Funston’s conference was. The guard said it was on the sixthfloor, and ushered me into an elevator. I suppose he thought Iwas a banker, a Haupt partner, or a lawyer. On the sixthfloor, people were milling around everywhere. I just walked offthe elevator and into the office where the meeting was—nobodystopped me. I didn’t understand much of what was going on. Igot the feeling that whatever was at stake, there was generalagreement but still a lot of haggling over details to be done. Ididn’t recognize anybody there but Funston. I stood aroundquietly for about five minutes before anybody noticed me, andthen everybody said, pretty much at once, ‘Good God, get outof here!’ They didn’t exactly kick me out, but I saw it wastime to go.”
During the haggling phase that followed—a painfully protractedone, it developed—the Haupt partners and their lawyers madea command post of Watts’s office, while the bankrepresentatives and their lawyers camped in the NorthCommittee Room, just down the hall. Funston, who wasdetermined that news of a settlement should be in the handsof investors before the opening of the market next morning,was going wild with irritation and frustration, and in an effortto speed things up he constituted himself a sort of combinationmessenger boy and envoy. “All Monday evening, I kept runningback and forth saying, ‘Look, they won’t give in on this point,so you’ve got to,’” he recalls. “Or I’d say, ‘Look what time itis—only twelve hours until tomorrow’s market opening! Initialhere.’”
At fifteen minutes past midnight, nine and three-quartershours before the market’s reopening, the agreement was signedin the South Committee Room by the twenty-eight parties atinterest, in an atmosphere that a participant has described asone of exhaustion and general relief. As soon as the banksopened on Tuesday morning, the Stock Exchange depositedseven and a half million dollars, a sum amounting to roughlyone-third of its available reserve, in an account on which theHaupt liquidator could draw; the same morning, the liquidatorhimself—James P. Mahony, a veteran member of theExchange’s staff—moved into the Haupt offices to take charge.
The stock market, encouraged by confidence in the newPresident or by news of the Haupt settlement, or by acombination of the two, had its greatest one-day rise in history,more than eliminating Friday’s losses. A week later, onDecember 2nd, Mahony announced that $1,750,000, hadalready been paid out of the Stock Exchange account to bailout Haupt customers; by December 12th, the figure was up to$5,400,000, and by Christmas to $6,700,000. Finally, onMarch 11, 1964, the Exchange was able to report that it haddispensed nine and a half million dollars, and that the Hauptcustomers, with the exception of a handful who couldn’t befound, were whole again.
THE agreement, in which some people saw an unmistakableimplication that Wall Street’s Establishment now felt accountablefor public harm caused by the misdeeds, or even themisfortunes, of any of its members, gave rise to a variety ofreactions. The rescued Haupt customers were predictablygrateful, of course. The Times said that the agreement wasevidence of “a sense of responsibility that served to inspireinvestor confidence” and “may have helped to avoid a potentialpanic.” In Washington, President Johnson interrupted his firstbusiness day in office to telephone Funston and congratulatehim. The chairman of the S.E.C., William L. Cary, who was notordinarily given to throwing bouquets at the Stock Exchange,said in December that it had furnished “a dramatic, impressivedemonstration of its strength and concern for the publicinterest.” Other stock exchanges around the world were silenton the matter, but if one may judge by the unsentimental waythat most of them do business, some of their officials musthave been indulging in a certain amount of headshaking overthe strange doings in New York. The Stock Exchange’smember firms, who were assessed for the nine and a halfmillion dollars over a period of three years, appeared to begenerally satisfied, although a few of them were heard togrumble that fine old firms with justified reputations for skilland probity should not be asked to pay the losses of greedyupstarts who overstep and get caught out. Oddly, almost noone seems to have expressed gratitude to the British andAmerican banks, which recouped something like half of theirlosses. It may be that people simply don’t thank banks, exceptin television commercials.
The Stock Exchange itself, meanwhile, was torn betweenblushingly accepting congratulations and prudently, if perhapsgracelessly, insisting that what it had done wasn’t to beregarded as a precedent—that it wouldn’t necessarily do thesame thing again. Nor were the Exchange’s officials at all surethat the same thing would have been done if the Haupt casehad occurred earlier—even a very little earlier. Crooks, who waschairman of the Exchange in the early 1950s, felt that thechances of such action during his term would have been aboutfifty-fifty. Funston, who assumed his office in 1951, felt that thematter would have been “questionable” during the early yearsof his incumbency. “One’s idea of public responsibility isevolutionary,” he said. He was particularly annoyed by the idea,which he had heard repeatedly, that the Exchange had actedout of a sense of guilt. Psychoanalytic interpretations of theevent, he felt, were gratuitous, not to say churlish. As for thoseolder governors who glared, quite possibly balefully, at thenegotiations from their gilt frames in the Governors’ Room andthe North and South Committee Rooms, their reaction to thewhole proceeding may be imagined but cannot be known.

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